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What seemed a booming success a couple of years ago has collapsed into fraud convictions, independent economist Brian Easton writes

Public Policy / opinion
What seemed a booming success a couple of years ago has collapsed into fraud convictions, independent economist Brian Easton writes

This is a re-post of an article originally published on It is here with permission.

I looked at the crash of FTX (short for ‘Futures Exchange’) in November 2022 to see whether it would impact on the financial system as a whole. Fortunately there was barely a ripple, probably because it was too small and most investors were not sufficiently integrated into the rest of the financial system to be borrowing from it to speculate on cryptocurrencies,

Subsequently its founder, Sam Bankman-Fried, was found guilty on seven charges of financial fraud. He comes up for sentencing later this month. My interest was compounded by Michael Lewis’s Going Infinite: The Rise and Fall of a New Tycoon. Lewis, who has a galaxy of impressive books including Liar’s Poker and The Big Short (which was made into a film), seemed quite taken in by SBF, as he is known. Even so, the book provides a valuable background to SBF’s career and FTX, although it was published before the revelations from the trial.

So what went wrong? FTX had some similarities to a bank. Depositing cryptocurrency with it made it easier to transact; its charges were low; it paid interest.

Banks pay interest out of the returns on loans, so what did FTX invest in? Accounts get a bit vague at this stage. At least some of the investments seem to have been in companies on the basis of capital gains. However, we know that there was a substantial commitment to an allied Hong Kong-based cryptocurrency trading firm – Alameda Research – which was given very favourable terms.

When this was discovered, and that there was around $US8b unaccounted for, the fall in confidence had customers trying to withdraw their holdings. It was like a run on a bank – FTX ran out of the wherewithal to pay them and it collapsed into ‘bankruptcy’. Revelations of fraud behaviour soon became apparent and led to SBF and some of his colleagues ending up in jail.

We really do not know just how big the FTX deficiency is; there are even claims it actually has sufficient funds. A run on a bank does not mean that the bank is broke. It may have the assets but cannot liquidate them fast enough to meet depositor withdrawals. Typically, the central bank steps in to support an approved bank – FTX was not.

We do know that the new CEO of FTX, John J. Ray III, who specialises in recovering funds from failed corporations, stated ‘[n]ever in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.’ He said there as ‘complete failure of corporate controls’; FTX’s companies had an ‘absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners’ and ‘did not have appropriate corporate governance’; some ‘never had board meetings.’ SBF agreed in court there was no risk management team at FTX, and apologised for its lack.


Rather than detailing further the way that FTX was run, or not run, or the fraud which happened, I ask why would anybody have deposited their assets with FTX? Here are some answers to the question with a common sense response.

Everyone else was doing it. And now they too wish they hadn’t.

It was a big company. It was then, but now?

It was paying good interest. How did you know it was not a Ponzi scheme?

It involved a new innovation. So they told you. Didn’t mean it would work.

SBF was ranked the 41st-richest American in 2022. But not in 2024.

SBF had a great reputation. How many cases do you know of people with great reputations who turned out to be frauds or failures? Read Michael Lewis and, admittedly with hindsight, come away concerned about SBF’s reputation. Alameda Research’s CEO (who was romantically involved with SBF) claimed that his hairstyle and clothes were part of a ‘well calculated’ image.

Why do you trust a conventional bank enough to place your savings in it? Yes, it has a reputation above that of FTX and SBF which is also backed by competent accounting and auditing and a risk management team. Moreover, it is regulated by an independent agency (in New Zealand, the Reserve Bank) which, not incidentally, has to make sure the supervision works because it may have to bail it out. That does not mean that you will never lose (some of) your cash – (see the Deposit Takers Act 2023) – but the probability is very low.

In contrast, SBF built a reputation as an advocate for greater regulatory oversight on the industry while, as Lewis reports, avoiding it. He told a reporter it was all ‘just PR’, adding ‘F**ck regulators; they make everything worse’ and they ‘don't protect customers at all’.

The critical notion here is ‘trust’. In the distant past there were only person-to-person transactions; each knew the other and could trust them. As the market economy evolved, transactions became between those who were not so intimately known, and eventually with anonymous persons and those who were not even persons, such as corporations. To facilitate those transactions we have public regulation. Sorry about that SBF, you need them to provide a sustainable service.

A jury found SBF guilty on all seven charges. I am not in a position to judge him on criminal fraud but some of his statements and behaviours leave me with the view he was recklessly fraudulent in any practical sense of the notion.

It is not impossible that FTX will have sufficient assets to pay out depositors (but perhaps not the interest owed). However, as one Bloomberg commentator observed, ‘“We lucked into enough money to pay everyone back” is not a legal defence to fraud’ – or a moral one.

SBF said he believed in ‘effective altruism’, which advocates choosing careers based on the amount of good that is expected to be achieved by one’s donations to worthy charities. While SBF made some claims which appeared to undermine such ethics, it is certainly true he gave a lot of money to worthy causes (and not so worthy ones, including political parties). He also gave some to friends, including his parents. I am not judging the philosophy here; one bad example does not disprove an ethical theory – as Christians will explain. But SBF’s career says something about the reality of human behaviour.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on It is here with permission.

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FTX did not crash in Japan because of the regulatory framework. All customers' funds on exchange were protected. This is why.

1. The FSA requires Japanese exchanges to keep at least 95% of customers' crypto in cold wallets. Because cold wallets are not connected to the internet, they are more secure against hacking and internal fraudsters. For the 5% of customer's crypto that can be kept in a less-secure hot [internet connected] wallet, Japanese exchanges must back each unit of hot-walleted crypto with exchange-owned crypto held in a segregated cold wallet. So, for example, if an exchange holds 5 BTC of customer funds in a hot wallet, it must hold another 5 BTC of its own personal coins in reserve, for a total of 10 BTC.

2. Japanese crypto exchanges must segregate customer fiat and crypto from the exchange's own crypto. That is, they can't deposit the exchange's own operating funds into the same account, or wallet, as their customers' funds.

 3. Japanese exchanges must entrust customers' fiat money balances to a third-party Japanese institution – a trust company or bank trust – where they are managed by a trustee with customers designated as the beneficiaries.

 4. A more explicit bankruptcy protection stipulates that customers of Japanese exchanges are entitled to receive payment in priority to general creditors in the case of bankruptcy.


Can you talk to this in terms of downsides for investors?  That is, are there disadvantages for customers that they might suffer losses as a result of this framework?


Can you talk to this in terms of downsides for investors?  That is, are there disadvantages for customers that they might suffer losses as a result of this framework?

Yes. And it's quite simple. Less opportunity for speculative behavior when the mechanisms (exchanges) don't enable it.

Basically Japanese crypto exchanges operate like most people think banks operate - like intermediaries. 

So less speculative behavior means less opportunity for price appreciation. That is a "downside" to many people.